Currency wars are fiat wars

February 18, 2013

The financial press is tossing the term “currency war” around with more abandon than partiers circulating punch at a New Year’s bash. Most commentators tell us we’re having such a war right now, though at least one denies it. James Rickards has published a book on the subject that’s become a hot seller. So what exactly is a currency war and why are nations engaging in it?

Wikipedia offers an explanation that reminds me of a man traversing a rickety bridge over a deep canyon. The first few planks feel secure, leading him onward to the middle, where the bridge sags and sways in the canyon’s updrafts. We read that a

Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency.

Why would countries devalue their currencies?

As the price to buy a particular currency falls so too does the real price of exports from the country.

Cheaper exports means – what? If an American dollar buys 5 Mexican pesos, then the dollar is said to be stronger against the peso, the peso cheaper against the dollar, and Mexican products marketed in the U.S. will be priced lower in dollars than otherwise. If those prices are lower than those of competing American firms, they will be more appealing to American buyers. Other things equal, low bid wins.

The flip side of this means that the country with the cheapest currency will experience diminished import trade. In our example, fewer American products will be sold in Mexico, ceteris paribus. Why? Because it requires more pesos to buy them. In other words,

Imports become more expensive.

Wikipedia concludes:

So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets.

Our bridge crosser has had a plank split under his foot. How could domestic industry and employment as a whole receive a boost? Domestic exporters receive a boost in demand in foreign markets because their stuff is priced lower in foreign countries. Employment in domestic exporting firms will receive a boost because of the increase in foreign demand. But domestic industry as a whole does not receive a boost because currency devaluation means their domestic customers have to pay higher prices. Industries that don’t export or whose exports are not a significant part of their revenue will suffer.

The Wikipedia article agrees, sort of:

However, the price increase for imports can harm citizens’ purchasing power.

What about price increases generally, caused by the flood of new money? These too will be impoverishing. Furthermore,

The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.

According to the U.S. Department of Commerce, exports accounted for 13.8% of GDP in 2011, a record high but still a small fraction of the total. Devaluing the currency for the alleged benefit of a small segment of the economy hardly makes economic sense when it penalizes all participants with higher prices. It also buttresses the sense that the currency wars will ignite a shooting war and end like all wars, with only a handful of winners and millions of losers. As we know Keynesians star-struck with World War II believe otherwise, and Keynesians run the economy.

Even the exporting firms will get hit when the devaluation stops and demand in foreign markets declines. If the devaluation doesn’t stop voluntarily, it will end at the brick wall of hyperinflation.

Nations are not unaware of this possibility and of the need to reassure investors that they’re not in fact on a fast track to monetary oblivion. MarketWatch tells us that

The Group of 20 finance ministers and central bank governors on Saturday [2-16-2013] pledged to monitor negative currency spillovers to other countries caused by monetary policies implemented for domestic purposes.

“Negative currency spillovers” is a euphemism for the harm inflicted on trading partners by subsidizing exports through monetary inflation. Of course they have only “pledged to monitor” these “spillovers,” not eliminate them. How careful they are with words when they’re careless with money.

The Swiss are traditionally anti-inflationary but they caved to their export firms after the Fed’s QE made the Swiss franc rise in value against the dollar. The Swiss bought up dollars (and euros) to keep the franc from rising in value against those currencies. The Swiss buy them up by printing more francs – i.e., by inflating – i.e., by counterfeiting. Japan is trying to do the same thing.

The whole purpose of government sovereignty over money is to inflate it to the advantage of itself and certain favored groups, beginning with the fractional reserve banking cartel. The inflation (or counterfeiting) will always work against the vast majority through higher prices and repeated cycles of euphoria followed by depression.

The solution is to establish a monetary system governed exclusively by the market forces of profit and loss. Banking and money should be completely divorced from government, without which the system as it presently exists would have collapsed long ago. On the market – the free market – there is no such thing as too big to fail or prices that are too low. The first step in getting there is to allow open competition of currencies